How To Make Money By Investing In Mutual Funds? There are basically two ways to make money and two ways to lose money by investing in mutual funds. Let’s get down to the basics.
There are thousands of funds to choose from and the vast majority of them will fall into one of four categories depending on where they invest money (your money). They are called: stocks (stocks), bonds, money market and balanced funds. In all of the above, you open an account, invest money, and it buys you stocks. You earn money by investing based on the number of stocks you own. The same is true if you lose money while investing.
Let’s start with the most popular and risky category called EQUITY FUNDS, which invests money in stocks, also known as “stocks”. Why invest money here? The primary goal is growth, with dividend income as a secondary goal. You make money by investing here when the stock price rises and through dividends. You lose money when the stock price goes down. Dividends come from the shares in the fund’s portfolio and are passed on to you. They (like all dividends) are yours. The main attraction of equity funds: the potential for high returns.
BOND FUNDS have one main objective: higher income in the form of dividends. They are also called INCOME FUND and are generally more secure than the variety of stocks. You invest money here to earn higher dividends than what you can get elsewhere. Dividends come from interest earned in the fund’s bond portfolio. You can also earn money by investing when the stock price rises; and lose money when the stock price goes down. Normally there are a lot less price fluctuations than what you will find in the stock or equity category.
BALANCED FUNDS are a happy medium between the above two, as they invest money in both stocks and bonds. Therefore, you make money from both rising stock prices and dividends, and you lose money investing when stock prices fall. Here you have a moderate risk.
MONEY MARKET FUNDS are the safe alternative and you make money investing in them in only one way: dividends. They invest money and earn interest in high-quality, short-term (money market) IOUs. This interest they pass on to you in the form of dividends. The share price is set at $ 1 and does not fluctuate. Investors very rarely lose money by investing here.
Most people invest money in mutual funds for the long term. So, in most cases, they simply allow the fund company to reinvest all dividends (and other distributions) to buy more shares. Distributions (like capital gains from the sale of shares) are a bit technical. Don’t worry, if you get them, you’ll get your share. And you will also receive periodic statements showing your account activity.
At the beginning, we said that there are basically two ways to make money and two ways to lose money by investing in mutual funds. What’s the second way you can lose money? Let me give you an example, and as a former financial planner I have seen this happen time and time again. Joe Blow decided to invest money in mutual funds through a “financial planner” (not me). He put $ 20,000 in an equity fund, and about a year later he looked at his last statement and it showed a total value of $ 19,000.
This year’s stock market has shown a modest gain. How did he lose money by investing? Answer: $ 1,000 has been disbursed to pay for selling costs called “charges”. About $ 300 went to annual fund expenses and $ 300 to additional expenses. Joe claims he knew nothing about these fees and charges.
You don’t have to pay a lot of money when you invest money in mutual funds. If Joe had left with NO-LOAD funds, he could have invested at a total cost of around $ 200 per year, for expenses. You can make money by investing in mutual funds for the long term. Don’t work against yourself by losing money because of high fees and charges.